Chapter 9, Problem 31P

Return to Figure 9.2. Suppose ${\text{P}}_0$ is $\$\text{1}0$ and ${\text{P}}_{\text{1}}$ is $\$\text{11}$.

Suppose a new firm with the same LRAC curve as the incumbent tries to bleak into the market by selling $\text{4},000$ units of output. Estimate from the graph what the new firm’s average cost of producing output would be. If the incumbent continues. to produce $\text{6},000$ units, how much output would the two films supply to the market? Estimate what would happen to the market price as a result of the supply of both the incumbent firm and the new entrant. Approximately how much profit would each firm earn?

Figure 9.2 Economics of Scale and Natural Monoploy